Singapore Stock Alpha Picks (December 2018) - A Mixed November

WHAT’S NEW

A mixed November.

November turned out to be a mixed month with some outperformers and underperformers within our alpha picks. On a portfolio basis, our picks gained an average of 1.0% m-o-m, which compares with the FSSTI’s advance of 2.5% during the month (see Straits Times Index Constituents Performance in November 2018).

Within our portfolio, notable outperformers include OCBC and Valuetronics, with the latter rising 6.3% due to a rebound in sentiment due to the temporary ceasefire between the US and China. We like OCBC as we believe there is ample room for dividend payout growth.

The underperformer within our portfolio is CSE Global, which retreated 3.3% as sentiment was hit by the reversal in oil prices.

ACTION

Adjusting portfolio to reflect recent developments.

We remove ST Engineering from our picks. While we still like the company and retain our BUY rating on the stock, there is a possibility that the stock could underperform over the short haul, as the street might not have fully factored in the potential of impairment charges in 4Q18. In its place, we add SATS as we believe it was unjustifiably sold down after a minor earnings miss for 2QFY18, which was due to the weakness in associate earnings.

We also introduce one of our mid-cap picks – FUYU - as an addition to our portfolio. We favour the stock for its sustainable dividend yield of 8.3% for FY18 and its compelling 2019F ex cash PE of 5.9x.

SATS has been unjustifiably sold down after a minor earnings miss for 2QFY18, which was due to weakness in associate earnings. Part of that was due to a weaker Indonesian rupiah, which has since strengthened. Thus, associate earnings are unlikely to weaken significantly in coming quarters.

SATS will also be key beneficiary of the truce in the trade war between the US and China, as re-export shipments from ASEAN will no longer be impacted in 1Q19. We believe that part of the earlier decline in SATS’ stock price was due to concerns over potentially lower cargo volumes processed out of SATS’ regional gateways. For at least the next three months, these concerns would be alleviated by the truce in tariffs by both the US and China.

High and sustainable dividend yield.

FUYU offers a high and sustainable dividend yield of 8.3% for FY18 and we expect it to increase to 8.8% in FY19, on the back of improving net profit, free cash flow, and strong net cash position of S$75m/S$0.10 per share, which is equivalent to 52% of market cap as of 3Q18.

Diversifying to a more stable business model.

In the past decade, FUYU relied heavily on customers in traditional industries such as printing and communications. However, it has reduced its revenue concentration on the printing segment from 50% in FY11 to 31% in FY17 and we expect this to continue as it wins more new customers.

Optimising and turning around loss-making operations.

FUYU has taken four key steps to optimise its business:

completed the privatisation of its 71%-owned Malaysia-listed subsidiary,

Expect earnings to play catch-up in the upcoming quarters.

Given the continued robust growth from the ICE segment, we expect earnings to be better in the upcoming quarter.

Limited impact from US trade tariff.

Management estimates that less than 10% of its revenue will be impacted by the new round of tariffs by the US. In the longer term, the group is looking to expand into ASEAN to reduce the impact from the US trade tariff.

Healthy demand expected to continue

for the industrial and commercial electronics (ICE) segment as it continues to enjoy better demand for connectivity modules used in the automobile industry.

Share Price Catalyst

Event: Higher-than-expected dividends or M&As, backed by net cash of S$132m or around 40% of Valuetronics’ market cap. More customers in the automobile or Internet of Things segments.

Higher NIMs from re-pricing of mortgages.

Management expects a significant portion of its mortgages to be re-priced in 3Q18, especially those pegged to long-term deposit rates and prime rates. It ensures that upward movements in SIBOR and SOR are sustainable before it adjusts the interest rates for mortgages. Mortgages accounted for 26.1% of OCBC's total loans. 3Q18 has already seen a decent 5bp uptick in NIMs to 1.72%.

Room to raise dividends.

We see room for OCBC to gradually raise dividends. The group’s dividend payout ratios are 40-50%.

Share Price Catalyst

Event:

Rising interest rates could help underpin NIMs.

The divestment of a 33.3% stake in Hong Kong Life Insurance for HK$2,366.7m (S$425.9m) is waiting for regulatory clearance and should be completed by end-18.

The merger between TPG Telecom and Vodafone Hutchinson Australia is positive as it will consolidate the market in Australia from four to three players, which could lead to pricing stability. As at 1QFY19, Optus accounted for 21% of SingTel’s pre-tax profit.

The group is least affected by a fourth mobile operator in Singapore as overseas businesses account for about 70% of its bottom-line. BUY with a target price of S$3.94.

Share Price Catalyst

Event:

Fund flow into laggards and defensive stocks, including Singtel which offers a good dividend yield (DPS commitment of 17.5 S cents/share for two years).

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